The Securities and Exchange Commission appears to be targeting a trio of smaller, privacy-focused cryptocurrencies, including Stellar’s lumen token, the world’s largest digital asset manager revealed in filings recently.
Grayscale Investments, whose Grayscale Bitcoin Trust and Grayscale Ethereum Trust hold $15.3 billion and $5.8 billion respectively, revealed in a June filing for its Stellar Lumens Trust, Zcash Trust and Horizen Trust that the regulatory agency has demanded the legal analyses it relied on to determine that the three tokens are not securities.
Under Chairman Gary Gensler, the SEC has said it believes virtually all cryptocurrencies except bitcoin are securities, which among other things makes it very difficult for them to be used for payments. From Grayscale’s perspective, if the tokens are found to fit that definition, it will have been selling unlicensed securities and would likely have to dissolve the trusts.
More than many other cryptocurrencies, the Stellar lumen, or XLM, is a payments token intended to store and to cheaply and quickly send money globally, including in the remittance market. But the Stellar Foundation has also been pushing the blockchain aggressively as a potential central bank digital currency platform, and it currently has a $2.6 billion market capitalization.
Still, it’s worth pointing out that an inquiry is not the same thing as actually declaring lumens or other tokens to be securities. However, it’s certainly a declaration of interest, as Grayscale has nearly 20 trusts for various coins, yet targeted inquiries only focused on these three, CoinDesk reported.
Targeting Small Tokens
The SEC has done the same with Zcash and Horizen, Grayscale revealed. These two are best known as privacy coins, with features that enable users to hide their transactions.
That category has been attracting more and more attention from regulators and prosecutors lately, as the question of the legality of privacy coins and mixing services becomes a bigger issue. Most notably, the Treasury Department this month placed mixing service Tornado Cash under sanctions — the first time computer code, rather than a person or company, has been targeted.
Beyond that, the SEC also specifically declared nine small and relatively obscure cryptocurrencies listed on Coinbase to be securities as part of an insider trading case brought against one of the top crypto exchanges in July.
Related: SEC Turns Up the Heat on Coinbase
That action was widely taken as a sign that the regulator is looking to get a court ruling that says a number of cryptocurrencies are securities before Congress writes regulations that clarify cryptocurrencies’ status under the law.
While most elected officials who have written draft rules governing crypto have acknowledged that such a bill won’t be voted on until next year, those bills — notably the Responsible Financial Innovation Act by Sens. Cynthia Lummis (R-Wyo.) and Kirsten Gillibrand (D-N.Y.) — would declare most cryptocurrencies to be non-securities, handing regulatory authority over to the Commodity Futures Trading Commission.
Another unusual SEC target was Dragonchain, a cryptocurrency launched in 2017 via an initial coin offering (ICO), Cointelegraph reported on Aug. 16. While the SEC sued a number of companies for launching ICOs around that time, demanding and receiving disgorgements from the founders, it basically stopped that a few years ago after ICOs launches stopped as a result.
Jumping in after another ICO, especially a five-year-old one, is another sign that the SEC is eager to make its case in court and in public as cryptocurrency legislation takes center stage.
Lumens, however, are a much bigger and better-known token than any of those. The Stellar blockchain launched on July 31, 2014, making it one of the earliest cryptocurrencies designed to challenge bitcoin as a payments token.
Assuming the agency is actually planning to go after the lumen — and that’s still an “if” — it would signal a new determination to focus on higher-profile cryptocurrencies and on coins that are specifically focused on use in payments, rather than broad smart contract platforms competing with Ethereum.
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